So is this a Bubble or a Boom – or a looming Bust?

Everywhere you look you see the word ‘bubble’ associated with the booming stock markets. I say ‘booming’ selectively as the word accurately describes anything to do with AI, but not to some other sectors, including EV makers (see last week’s blog for the disaster there).

As AI magically pulls the indexes upwards like a magnet – the S&P has made an astonishing 16 up weekly closes out of the last 18 – it reminds me of the famous Sorcerer’s Apprentice scene in Disney’s 1940 animated movie Fantasia. When the Sorcerer goes to bed, the Apprentice (aka Mickey Mouse) feels he can do better. He grabs the magic broom, casts a wonky spell and as it all goes wrong, couldn’t stop the breakaway brooms from flooding the basement with the water ever rising (wrong spell!). When the Sorcerer wakes up, he magically causes the water to disappear with the proper spell and all is back to normal. Did Mickey learn his lesson?

So is Nvidia the Sorcerer of AI casting a spell over the market that can only result in severe flooding when that share falls asleep? And is the term Fantasia appropriate for this AI mania?

As stock indexes rise, the fundamentalist pundits always raise their forecasts not only of earnings to come but also the price target level of the indexes. This is the herding instinct at work. But the greater the consensus the more likely those predictions will fail to arrive.

Here is a typical sample of current MSM consensus:

The stream of index records this year has strategists racing to increase their targets for the S&P 500, with Bank of America’s Savita Subramanian the latest to do so. “Bull markets end with euphoria — we’re not there yet,” Subramanian said. Goldman Sachs strategist David Kostin agrees, saying that the big tech-led rally is backed by fundamentals and doesn’t resemble past bubbles. Bond traders, meanwhile, are still looking to snap up US debt on the assumption that the US economy will eventually slow. Losses in bond markets since 2021, however, have all but wiped out any extra gains over cash for the last decade.

Here is a sample of what these pundits (here from Goldman Sachs) are forecasting for the S&P

Just take a moment to savour this roadmap. It calls for a straight line move to 5100 by end of year.

Folks, has Goldman ever looked at the gyrations in the chart’s history? Evidently not. Even if they are right and the S&P can reach 5100 in December (statistically near impossible), could it collapse first to the early 2023 low at 3600 (for a move of -25%) – or lower? And how many investors could suffer such a decline with many issues losing a lot more than that?

That’s the boom part. As for the bubble adherents, they are getting thin on the ground as markets rise. Some are saying all the bears have now disappeared with their tails between their legs.

What they miss is the obvious – for every bull who is buying there is a bear on the opposite side of the trade. These sellers do not think the shares can go higher, otherwise they would wait for a better (higher) price to sell. Thus, most of the MSM commentary you read is utter ?zx$Q%!

Of course, all of these opinions of bubble or boom are mostly subjective and career-driven. It is usually hazardous to your career if you deviate from consensus too much, especially if you are proved wrong. Even if proved right, there are usually few benefits accruing, except for bragging rights down the pub. So lots of downside with little upside. What would you do?

As a totally independent observer whose sole motive is profit, I can say that the most useful method for forecasting major financial markets is the Elliott wave model combined with sentiment measures with the proviso that no method is always 100% accurate including the EWT. With the EWT you have to choose between competing alternative wave counts with some pointing to different directions. Only when the market progresses in your direction (after taking a position on inadequate information, of course) can you say yours is the one chosen by the trading gods.

Forecasting correctly without having a trade on is a sheer waste of time and effort. Incorrect choices are punished but losses are limited by the good use of stops – that is what I have always advised for all traders.

Friday was a very interesting and potentially landmark session for the US indexes. A new ATH was set (not unusual), but by the close indexes had fallen hard to close down sharply on the day. Here is the S&P 500

The action since December has been kept inside the lovely trading channel enclosed by my tramline. It looks like an Ending Diagonal that often appears at the end of a very long rally or bear phase. On Friday it hit the upper tramline for a new ATH at 5,256 but by the session’s close had closed well inside the channel at 5,195 for a loss of over 60 points (see Nvidia below).

So was Friday a buying exhaustion? This headline sums it up nicely: Complacency – who is left to buy? Who indeed? The larger picture shows the S&P in wave 5 of 5 (see previous blogs) which is the final wave of the massive bull market at least since the Great Depression low of 1932. This means that the next big move will be down in a similar scale to the post-1932 rally – or steeper.

Is the AI juggernaut running out of gas?

In my blogs (see last week’s A Cautionary Tale for Nvidia Fans) – I have been asking if the AI juggernaut will keep rolling for another 3-4 years. I allude to the dotcom boom of the 1990s when Alan Greenspan made his ‘irrational exuberance’ comment – about 3 years before the final top, please note. He was a tad early when valuations were already stretched. I noted recently one fly in the AI ointment could be the likelihood of competition for Nvidia coming from its closest competitor, Huawei.

And lo and behold, I see today that the Chinese company is indeed working on advanced AI chips using US made equipment even! So the stage may be setting for a top – and was Friday’s action giving me it?

The other major point is that the AI algorithms are biased. Asking them to provide a picture of a Viking and the result is a cartoon warrior character with horned helmets with copious body armour and weapons. While that may be appropriate for the kid’s Saturday morning cartoons, the reality is that Vikings did not wear horned helmets and their clothes were made from wool and flax – like we British at the time. Is there an AI backlash coming?

Nvidia made a new ATH at $975 on Friday at 3:30 pm UK time and promptly fell hard to close at $872 – a massive loss of 10.5% off the ATH for the biggest daily loss in its young history.

That looks very much like a Buying Climax to me. But if the dip buyers have any ammo left we could see one more push up early in the week. Otherwise, a strong wave down will have got under way and it should start getting ugly. I shall be watching the action next week with great interest!

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ANNOUNCEMENT

I have been providing my weekly blogs as open source since I started back in 2013 but now I have decided to make them available inside a paywall for a modest subscription. That switch will happen soon – please watch out for it. Regular readers will know that my blogs have very often contained useful and very timely actionable analysis on specific markets.

Just recently my Gold coverage has been well worth the price of admission! I identified a wave 3 of 3 of 3 up a few weeks ago when gold was trading well under $2,000. Now look at it.

Gold has advanced by almost $200 (10%) since my first entry. Is it coincidence that Nvidia lost 10% in one day on Friday alone?

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Back in the real world, the Wall of Worry is getting ever taller. Here is one recent headline: US Credit Card debt rises to a new all time high as card rates rise to a new record. So is the US consumer in as great a shape as many believe? And so the humongous debt pile owned by the public and governments keeps rocketing ever upwards. One day something is going to break.

That is one reason the dollar is now trending lower. and is following my roadmap

The wave 1 down off the Sept/Oct 2022 top has been very complex – and very tough to trade (I mostly stayed away).

But now I have a high confidence roadmap that calls for a move down from the current 102.70 to the BRN (Big Round Number) 100. The equivalent move on the EUR/USD is from the current 1.0940 to 1.13. Much lower levels in the dollar (higher in the euro) are likely.

So what would a much lower dollar infer? For one thing, a much lower interest rate (higher bond prices) and Treasury yield outlook. But with US government borrowing set to keep expanding (unless of course the newly elected President Trump (?) orders massive cutbacks in government spending), is this consistent with lower yields?

Consensus is that yields will have to rise because of increased Treasury supply to come. My forecast is against consensus.

So maybe that’s the key to a renewed rally in Treasuries. The market may be awakening to the prospect Trump will be re-elected in November and he will cut government spending and cut interest payments on Treasuries. If he can do that, he would certainly be a miracle worker!

But he may have a tailwind with possibly lower Fed rates later and with the public. He could scrap Biden’s lunatic wasteful “Inflation Reduction Act” boondoggles with a stroke of the pen – and save billions in taxpayers’ money – and watch all those pie-in-the-sky ‘green’ projects die on the vine. Along with their share prices.

Already, car manufacturers (ex-China) are scaling back their EV ambitions – including notably the Apple EV project. The public – outside of the ‘elite’ – has never really bought into the Net Zero fantasia and with EVs in steep decline, dollar and cents market reality is re-taking the upper hand.

So with a Trump Presidency, major upheavals in markets are assured and markets are starting to wake up to this prospect.

Has the world reached Max Crazy yet?

Almost everyday I see stories that keep me spluttering in my coffee and it’s a wonder I have anything left in the cup to actually drink. Out of a crowded field, here is today’s classic: Male soldiers in Spain change genders to receive better benefits and higher pay as a woman.

Yes folks, male Spanish soldiers can now self-identify as female and get better sleeping quarters and higher pay only available to females. Many have even kept their male characteristics including tackle and beards. One soldier said:: “For changing my gender, I have been told that my pension has gone up because women get more to compensate for inequality. I also get 15 percent more salary for being a mother.”

The classic 1950s song Lady of Spain I Adore You is now taking on a whole new meaning.

Well before my time, the Bearded Woman was a fairground attraction. So can we expect to see a come-back? I am sure the alphabet soup of gender promoters failed to anticipate that.

So what comes next to top that? I await with heightened anticipation!

Markets now have a yen for the yen

It had to happen – eventually. And it is. The Japanese have kept their government bonds at a negative yield continuously as they swam against the tide of the global move to higher bond yields in recent months post-pandemic, They have been the only major central bank to keep rates negative. This has put pressure on the yen in order to aid exports.

But the times they are a-changin’. And not before time. Now, the dam is breaking with domestic inflation on the rise with yields following suit. This a historic event. The JCB has kept yields low for so long that trading them has become known in the West as the ‘widow maker’. But not for much longer.

You might wonder who would be so price-insensitive (aka foolish) as to actually buy bonds that guaranteed a loss if held to maturity? Well, many domestic pension funds and insurance companies are mandated to do just that but now with much better yields on offer globally (and taking an exchange risk), Japan bond buyers are now thinning out.

Of course, I wondered about the sanity of buyers of the negative yield on US Treasury bonds during the pandemic. That didn’t last long.

But Mrs Watanabe (the old nickname for the Japanese stay-at-home housewife aka the Mom ‘n Pops) has just discovered foreign bonds pay a lot more than the Japan Post Office. And with the yen rolling over from the 152 USD/JPY ‘Double Top’, that trend should continue.

The wave 3 down has just got under way and my first target is the wave 1 low at the 140 area,

Are the Ags making major lows?

Wheat has been in a savage two-year bear market from the $13.70 high to the recent $5.35 lows (for a near Fib 62% retrace). Massive production gains (partly caused by increases in the global CO2 plant food concentrations) is responsible.

But since the cure for low prices is low prices, the markets will reverse at some point and when they do, I expect monster gains. I am following Wheat, Corn and Soybeans for my VIP Traders Club members.